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MOST PAYCHECKS TO SHRINK, DESPITE ‘CLIFF’ DEAL
The ink is barely dry on legislation to steer clear of the fiscal cliff, yet workers soon will feel the impact.While the American Taxpayer Relief Act hits upper-income people much harder than most people, employees across the board will see their paychecks shrink from higher Social Security taxes. These payroll-withholding taxes had been reduced by 2 percent in 2011 and 2012, but that tax holiday expired with the new year.Arizonans earning the state-average personal income of $35,000 will have $700 less in their paychecks this year, or about $58 a month.However, the impact won’t be immediate."Because the fiscal-cliff deal was passed so late, workers may not see anything changing in their next two to three paychecks,” said Sam Kerch, controller at Scottsdale-based Symmetry Software, which provides withholding calculators at paycheckcity.com. Providers could take an average of four weeks to reflect the new changes, he said in a statement.It is unclear whether additional money would be withheld to catch up.Most other provisions will take even longer to be felt, and a lot of people won’t be affected. The big exception: Individuals with taxable income above $400,000 will feel the sting of a top rate of 39.6 percent, as will married couples making more than $450,000. The new brackets thus become: 10, 15, 25, 28, 33, 35 and 39.6 percent.Higher exemption amounts and other “patches” to the Alternative Minimum Tax, also included in the fiscal-cliff legislation, will help most middle-income Americans avoid that levy. “The latest patch immediately saves over 60 million taxpayers from being subject to AMT on returns about to be filed for the 2012 tax season,” states tax-researcher CCH in a new analysis.The bill also extends marriage-penalty relief, largely by increasing the standard deduction for joint filers.Highly paid employees could notice as many as three payroll changes, Kerch said. The first is the reduction of 2 percent for Social Security withholding. The second is increased taxes on those individuals earning above $400,000 and married couples with taxable income over $450,000. The third is a new 0.9-percent Medicare tax. The last levy applies to individuals earning above $200,000 and married couples making over $250,000.Higher-income individuals might need to adjust their withholding amounts to ensure that adequate tax is taken out of each paycheck, Kerch said.Taxpayers above $400,000/$450,000 in income also will pay a higher top rate of 20 percent on long-term capital gains and qualified dividends, rather than the 15percent rate that applied through 2012. Otherwise, the 15percent rate will remain, and people who pay taxes in the 10- and 15percent brackets will pay zero in capital gains.“Anyone in the first two ordinary-income brackets won’t have to pay any capital-gains tax,” said Jason Miller, director of financial planning in Arizona for BMO Private Bank.Capital-gains rates as high as 28percent still apply on profits from the sale of collectibles, said CCH.Because high-income Americans also face new taxes resulting from health-care reform, they now face top effective rates of 23.8 percenton long-term gains and 43.4 percent on short-term profits, according to CCH.“Unlike the rhetoric of the campaign trail, the line separating the middle-class from the rich was drawn, for the most part, at $450,000 of income, for a couple filing jointly, rather than $250,000,” noted David Joy, chief market strategist at Ameriprise Financial, in a statement.Upper-income taxpayers also face new restrictions on how much in itemized deductions they can take, which could crimp charitable donations and have other fallout. Singles with income over $250,000 and joint filers above $300,000 won’t be able to claim some of their otherwise-allowable deductions.And continuation of the estate tax, though at relatively mild levels, will hit wealthy Americans while sparing everyone else. The new top estate tax of 40 percent applies after a $5.1 million per-person exemption, to be adjusted for inflation in future years.“I was surprised they kept the exemption amount that high,” said Miller. It was scheduled to fall to just $1 million starting this year.“Not many people will be affected by the income- or estate-tax provisions,” he added. “But the 2percent payroll tax will hit all workers.”The bill extended several deductions and credits that had expired, but in a somewhat haphazard fashion. For example, you may continue to deduct state and local sales taxes rather than state/local income taxes, but only though 2013. This could be helpful if you buy a car other other big-ticket item this year.Meanwhile, an enhanced $1,000 child tax credit was made permanent, as were enhanced credits for adoptions and child/dependent care. The American Opportunity Tax Credit, worth up to $2,500 per student to pay for higher education, was extended through 2017, but a tuition deduction available to non-itemizers was extended only through 2013.Seniors 70.5 and older can elect to transfer up to $100,000 annually from an IRA to charities without having to first include that money as taxable income. That rule was extended through 2013.T